Educational Articles

Education: The Model Portfolios

Ian Gendler
| July 19, 2010

Value Line manages four 20-stock Portfolios that are reviewed and updated in each week’s Selection & Opinion (For a free sample, click here). Every individual possesses a unique investment strategy and risk tolerance, and our goal is to offer actively-managed Model Portfolios that are of interest to a wide range of the investment community.

Portfolio 1 caters to the more aggressive investor wanting to emphasize year-ahead price performance. Thus, to be considered for inclusion, a stock must have a Timeliness rank of 1 or 2 and a Financial Strength rating of at least B+ at the time of purchase. Although the analyst managing the portfolio can sell a holding at any time, either to replace it with a stock that seems to have greater potential or to realign the portfolio diversification, any stock whose Timeliness rank falls to 3 or lower is automatically dropped. The equities in Portfolio 1 tend to have above-average records for earnings growth, typically do not pay dividends, and possess Betas considerably higher than 1, which likely indicates that they will increase the risk/reward profile of the portfolio.

Portfolio II is appropriate for moderate-risk investors, and includes stocks that provide above-average income and whose prices have the potential to increase. To be included in the portfolio, a stock must pay a large enough dividend so that its yield ranks in the top half of all stocks tracked in The Value Line Investment Survey. It must have a Timeliness rank of at least 3 and a Safety rank of 3 or higher at the time of selection. If the Timeliness or Safety rank drops below 3, the stock is automatically dropped from the portfolio. The portfolio includes some value stocks, which are equities with generally lower P/E ratios than the other stocks Value Line tracks in The Value Line Investment Survey. With few exceptions, the Betas of the stocks in Portfolio 2 are below—sometimes well below—those in Portfolio 1, which indicates that the risk associated with this group is usually less than Portfolio 1.

Investors focused on long-term capital gains ought to concentrate on Portfolio III, which focuses on stocks that possess worthwhile 3- to 5-year appreciation potential. For inclusion, issues must have Timeliness and Safety ranks of 3 or better, but it can contain stocks that do not have a Timeliness rank because of recent restructurings or pending acquisitions. Compared with Portfolios I and II, this portfolio is more diverse, and the ratio of price-to-earnings can vary greatly from one stock to another. Some stocks in this portfolio pay dividends, while do not.

Investors interested in income should take a look at Portfolio IV. It focuses on stocks with above-average dividend yields. In fact, for inclusion, an equity must have a yield that is, at minimum, one percentage point above the median of all dividend-paying stocks tracked in The Value Line Investment Survey, a Timeliness rank of at least 3, and a Financial Strength rating of B+ or higher at the time of purchase. Despite the focus on current income, stocks are typically selected from a broad range of industries, providing a meaningful degree of diversification. The portfolio's risk profile will likely be less than the broader market, given the usual concentration of low-Beta stocks.

Each one of Value Line’s Model Portfolios has a specific investment strategy and goal. We strive to provide portfolios that will be of great interest to our readers, and hope that they can find at least one of these portfolios that meet their investment objectives and risk level.